Deck 17: Accounting for Income Taxes

Question 1

Publicly-traded companies usually file their financial statements before they file their federal income tax returns.

Answer 1

True

Question 2

The focus of ASC 740 is the income statement.

Answer 2

False
Explanation: The focus of ASC 740 is the balance sheet.

Question 3

A corporation evaluates the need for a valuation allowance by comparing both positive and negative evidence that the corporation will realize a deferred tax asset in the future.

Answer 3

True

Question 4

Temporary differences that are cumulatively "favorable" are referred to as taxable temporary differences.

Question 5

ASC 740 applies a two-step process in determining if an uncertain tax benefit should be recognized.

Question 6

ASC 740 applies to accounting for state and local and international income taxes as well as federal income taxes.

Question 7

ASC 740 deals with accounting for uncertain tax positions.

Question 8

A corporation undertakes a valuation allowance analysis to determine if a deferred tax asset should be recognized on the balance sheet.

Question 9

The "current income tax expense or benefit" always represents just the taxes paid or refunded in the current year.

Question 10

Congress reduced the corporate tax rate from 35 percent to 21 percent effective in 2018. The tax rate change will affect only deferred tax assets and liabilities that arise in 2018 and thereafter.

Question 11

In general, a temporary difference reflects a difference in the financial basis and tax basis of an asset or liability on the balance sheet.

Question 12

A cumulative financial accounting (book) loss over three years likely would be considered significant negative evidence in a valuation allowance analysis.

Question 13

The Emerging Issues Task Force assists the FASB by providing guidance on the implementation of ASC 740 and other accounting pronouncements.

Question 14

Tax-exempt interest from municipal bonds is an example of a permanent book to tax difference.

Question 15

Temporary differences create either a deferred tax asset or a deferred tax liability.

Question 16

ASC 740 governs how a company accounts for all taxes it incurs.

Question 17

A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.

Question 18

The tax effects of permanent differences generally are reported in a company's computation of its effective tax rate.

Question 19

ASC 740 is the sole source of rules related to accounting for income taxes.

Question 20

Brown Corporation reports $100,000 of gain from the sale of land on its income statement. For tax purposes, Brown uses the installment method and reports gain of $10,000. The $90,000 difference in the gain reported is a deductible temporary difference.

Question 21

Potential interest and penalties that would be assessed on a disallowed unrecognized tax benefit must be recorded in a company's income tax expense under ASC 740.

Question 22

Which of the following statements is true?

A) Another name for a taxable temporary difference is an unfavorable difference.
B) Another name for a taxable temporary difference is a favorable difference.
C) Another name for a deductible temporary difference is a favorable difference.
D) Another name for a deductible temporary difference is a permanent difference.

Question 23

Which of the following book-tax basis differences results in a deductible temporary difference?

A) Book basis of an employee post-retirement benefits liability exceeds its tax basis.
B) Book basis of a building exceeds the tax basis of the building.
C) Book basis of an acquired intangible exceeds the tax basis of the intangible.
D) Tax basis of a prepaid liability exceeds the book basis of the liability.

Question 24

Davison Company determined that the book basis of its net accounts receivable was less than the tax basis of its net accounts receivable by $800,000 due to a difference in the allowance for bad debts account. This basis difference is characterized as:

A) Deductible temporary difference.
B) Taxable temporary difference.
C) Favorable permanent difference.
D) Unfavorable permanent difference.

Question 25

ASC 740 permits a corporation to net its deferred tax assets and deferred tax liabilities regardless of the jurisdiction in which they arise.

Question 26

Grand River Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $100,000, unfavorable temporary differences of $10,000, and favorable permanent differences of $80,000. The corporation's current income tax expense or benefit would be:

A) $105,000 tax benefit.
B) $88,200 tax expense.
C) $86,100 tax benefit.
D) $69,300 tax expense.

Question 27

Once determined, an unrecognized tax benefit under ASC 740 is not readjusted for subsequent events.

Question 28

Which of the following items is not a temporary difference?

A) Vacation pay accrued for tax purposes in a prior period is deducted in the current period.
B) Tax depreciation for the period exceeds book depreciation.
C) A goodwill impairment expense is recorded on the income statement; the goodwill did not have a tax basis when it was created.
D) Bad debts charged off in the current period exceed the bad debts accrued in the current period.

Question 29

Packard Corporation reported pretax book income of $500,000. Included in the computation were favorable temporary differences of $10,000, unfavorable temporary differences of $100,000, and unfavorable permanent differences of $80,000. The corporation's current income tax expense or benefit would be:

A) $140,700 tax expense.
B) $123,600 tax benefit.
C) $121,800 tax expense.
D) $105,000 tax benefit .

Question 30

Which of the following statements best describes the objective(s) of ASC 740?

A) To compute a corporation's current income tax liability or benefit.
B) To recognize deferred tax liabilities and assets.
C) To report permanent differences in the balance sheet.
D) To both compute a corporation's current income tax liability or benefit and to recognize deferred tax liabilities and assets.

Question 31

Smith Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Smith's deferred income tax expense or benefit would be:

A) Net deferred tax expense of $6,300.
B) Net deferred tax benefit of $6,300.
C) Net deferred tax expense of $14,700.
D) Net deferred tax benefit of $14,700.

Question 32

A corporation's effective tax rate as computed in its income tax note is the company's cash tax rate for the year.

Question 33

Costello Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Costello received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Costello's deferred income tax expense or benefit would be:

A) $7,350 net deferred tax expense.
B) $7,350 net deferred tax benefit.
C) $7,950 net deferred tax benefit.
D) $7,980 net deferred tax expense.

Question 34

Abbot Corporation reported pretax book income of $500,000. During the current year, the reserve for bad debts increased by $5,000. In addition, tax depreciation exceeded book depreciation by $40,000. Finally, Abbot received $3,000 of tax-exempt life insurance proceeds from the death of one of its officers. Abbot's current income tax expense or benefit would be:

A) $105,000.
B) $104,370.
C) $97,650.
D) $97,020.

Question 35

Which of the following taxes would not be accounted for under ASC 740?

A) Income taxes paid to the German government.
B) Income taxes paid to the U.S. government.
C) Value-added taxes paid to the Swiss government.
D) Income taxes paid to the City of New York.

Question 36

Which of the following best describes the focus of ASC 740?

A) ASC 740 uses an "asset and liability approach" that focuses on the balance sheet.
B) ASC 740 uses an "income and expense approach" that focuses on the income statement.
C) ASC 740 uses a "taxes paid or refunded approach" that focuses on the statement of cash flows.
D) ASC 740 uses a "permanent differences approach" that focuses on the effective tax rate reported in the income tax note to the financial statements.

Question 37

Which of the following temporary differences creates a deferred tax asset in the year in which it originates?

A) Accelerated tax depreciation in excess of straight-line book depreciation.
B) Prepayment income reported as income on the tax return prior to being reported as income on the financial income statement.
C) Gain reported on the income statement prior to being reported on the tax return.
D) Prepayment deduction reported on the tax return prior to being reported on the income statement.

Question 38

Which of the following items does not result in a permanent difference?

A) Accelerated tax depreciation in excess of straight-line book depreciation.
B) Interest income from a tax-exempt municipal bond.
C) Dividend received deduction on the income tax return.
D) Excess tax benefits from the exercise of an NQO.

Question 39

Entities classify all deferred tax assets and liabilities as current on the balance sheet.

Question 40

Which of the following groups does not issue rules that apply to accounting for income taxes?

A) FASB.
B) SEC.
C) EITF.
D) IRS.

Question 41

Which of the following statements best describes a valuation allowance as it relates to accounting for income taxes?

A) A valuation allowance is a contra account to deferred tax assets only.
B) A valuation allowance is a contra account to deferred tax liabilities only.
C) A valuation allowance is a contra account to deferred tax assets and liabilities.
D) A valuation allowance is a contra account to noncurrent deferred tax assets only.

Question 42

Bruin Company received a $100,000 insurance payment on the death of its company president. The company annually paid $1,000 of non-deductible insurance premiums on the policy. Bruin reported the insurance receipt as income and deducted the premium payments on its books. For ASC 740 purposes, the income and deduction are characterized as:

A) Both are taxable temporary differences.
B) Both are deductible temporary differences.
C) The insurance receipt is a favorable permanent difference and the premium payment is an unfavorable permanent difference.
D) The insurance receipt is a taxable temporary difference and the premium payment is an unfavorable permanent difference.

Question 43

Knollcrest Corporation has a cumulative book loss over the past 36 months. Which of the following statements best describes how this fact enters into the valuation allowance analysis?

A) The book loss is considered sufficient negative evidence that a valuation must be recorded.
B) The book loss is considered negative evidence that must be evaluated along with other evidence as to whether a valuation allowance should be recorded.
C) The book loss is not considered negative evidence because it relates to book income and not taxable income.
D) A cumulative book loss is considered negative evidence only after a period of 60 months.

Question 44

Marlin Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Marlin subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Marlin's current income tax expense or benefit would be:

A) $236,250 tax expense.
B) $233,100 tax expense.
C) $210,000 tax expense.
D) $205,800 tax expense.

Question 45

Robinson Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000 (taxed at 34%). During the year, Robinson reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. During the year, Congress reduced the corporate tax rate to 34%. Robinson's deferred income tax expense or benefit for the current year would be:

A) Net deferred tax benefit of $6,300.
B) Net deferred tax expense of $6,300.
C) Net deferred tax benefit of $6,700.
D) Net deferred tax expense of $6,700.

Question 46

Which of the following statements is true?

A) ASC 740 focuses on the income tax expense or benefit on the income statement.
B) ASC 740 focuses on the balances in the deferred tax assets and liabilities on the balance sheet.
C) ASC 740 focuses on the income taxes paid or refunded in the Statement of Cash Flows.
D) ASC 740 focuses on the computation of a company's effective tax rate in the income tax note to the financial statements.

Question 47

Swordfish Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. In prior years, tax depreciation exceeded book depreciation by a cumulative amount of $500,000. Finally, Swordfish subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Swordfish's deferred income tax expense or benefit would be:

A) $23,100 net deferred tax expense.
B) $23,100 net deferred tax benefit.
C) $26,250 net deferred tax benefit.
D) $26,250 net deferred tax expense.

Question 48

Jones Company reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000, unfavorable temporary differences of $20,000, and favorable permanent differences of $40,000. Book equivalent of taxable income is:

A) $440,000.
B) $400,000.
C) $360,000.
D) $330,000.

Question 49

Which of the following statements best describes "book equivalent of taxable income" (BETI)?

A) BETI is book income adjusted for all permanent and temporary differences.
B) BETI is book income adjusted for all temporary differences.
C) BETI is book income adjusted for all permanent differences.
D) BETI is book income before adjustment for all permanent and temporary differences.

Question 50

Which of the following statements about ASC 740 as it relates to uncertain tax positions is true?

A) ASC 740 deals with all tax benefits involving income and non-income taxes.
B) ASC 740 deals with whether a recognized income tax benefit will be realized.
C) ASC 740 deals with recognized tax benefits related to income tax positions claimed on a filed tax return.
D) ASC 740 deals with recognized tax benefits related to income tax positions regardless of whether the item is taken on a filed tax return.

Question 51

A valuation allowance is recorded against a deferred tax asset when:

A) It is probable that the deferred tax asset will not be realized in the future.
B) It is more likely than not that the deferred tax asset will not be realized in the future.
C) It is highly likely the deferred tax asset will not be realized in the future.
D) It is remote the deferred tax asset will not be realized in the future.

Question 52

Lynch Company had a net deferred tax asset of $68,000 at the beginning of the year, representing a net taxable temporary difference of $200,000 (taxed at 34%). During the year, Lynch reported pretax book income of $800,000. Included in the computation were favorable temporary differences of $20,000 and unfavorable temporary differences of $50,000. At the beginning of the year, Congress reduced the corporate tax rate to 21%. Lynch's deferred income tax expense or benefit for the current year would be:

A) Net deferred tax benefit of $6,300.
B) Net deferred tax expense of $6,300.
C) Net deferred tax benefit of $32,300.
D) Net deferred tax expense of $32,300.

Question 53

Which of the following items is not a permanent book/tax difference?

A) Tax-exempt life insurance proceeds.
B) Non-deductible meals expense.
C) Accrued vacation pay liability not paid within the first 2½ months of the next tax year.
D) Excess tax benefits from the exercise of NQOs.

Question 54

Which of the following statements best describes the ASC 740 process for evaluating a company's uncertain tax positions?

A) ASC 740 requires a company to complete a two-step analysis every time it evaluates its uncertain tax positions.
B) ASC 740 requires a company to complete step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more-likely-than-not that that its tax position will be sustained on its merits (recognition).
C) ASC 740 allows a company to take into account the probability of audit by a tax authority in step 1 (measurement) in its evaluation of its uncertain tax positions.
D) ASC 740 allows a company to record a tax benefit from an uncertain tax position only if it is probable the benefit will be sustained on audit by a tax authority.

Question 55

Which of the following items is not considered evidence in determining if a valuation allowance is necessary?

A) A cumulative book loss over some period of time.
B) Management projects future taxable income based on a backlog of signed contracts.
C) A net operating loss expired unused in the current year.
D) Management can implement a tax strategy to create future taxable income, but it will be detrimental to the future profitability of the company.

Question 56

Which of the following statements is true?

A) A change in capitalized inventory costs under §263A always produces an increase in a deferred tax asset.
B) A change in capitalized inventory costs under §263A always produces a decrease in a deferred tax asset.
C) A change in capitalized inventory costs under §263A can produce an increase or a decrease in a deferred tax asset.
D) A change in capitalized inventory costs under §263A always produces a permanent difference.

Question 57

Kedzie Company determined that the book basis of its liability for "other post-retirement benefits" (OPEB) exceeded the tax basis of this account by $10,000,000. This basis difference is characterized as:

A) Deductible temporary difference.
B) Taxable temporary difference.
C) Favorable permanent difference.
D) Unfavorable permanent difference.

Question 58

Weaver Company had a net deferred tax liability of $34,000 at the beginning of the year, representing a net taxable temporary difference of $100,000 (taxed at 34%). During the year, Weaver reported pretax book income of $400,000. Included in the computation were favorable temporary differences of $50,000 and unfavorable temporary differences of $20,000. At the beginning of the year, Congress reduced the corporate tax rate to 21%. Weaver's deferred income tax expense or benefit for the current year would be:

A) Net deferred tax benefit of $6,300.
B) Net deferred tax expense of $6,300.
C) Net deferred tax benefit of $6,700.
D) Net deferred tax expense of $6,700.

Question 59

Which of the following statements is true?

A) In determining if a valuation allowance is needed, positive evidence is considered more persuasive than negative evidence.
B) In determining if a valuation allowance is needed, negative evidence is considered more persuasive than positive evidence.
C) In determining if a valuation allowance is needed, negative and positive evidence must be evaluated equally.
D) In determining if a valuation allowance is needed, only negative evidence is evaluated.

Question 60

Tuna Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, book depreciation exceeded tax depreciation by $100,000. Finally, Tuna subtracted a dividends received deduction of $15,000 in computing its current year taxable income. Book equivalent of taxable income is:

A) $1,125,000.
B) $1,110,000.
C) $1,015,000.
D) $985,000.

Question 61

Which of the following statements concerning the classification of deferred tax assets and liabilities is true?

A) A deferred tax asset is classified as noncurrent if the company expects the future tax benefit to be received more than 12 months from the balance sheet date.
B) All deferred tax assets and liabilities are treated as noncurrent.
C) A deferred tax asset related to a bad debt reserve is classified as current if the related accounts receivable is classified as a current asset.
D) A deferred tax asset related to inventory capitalization is classified as noncurrent if the company uses a FIFO accounting method and the inventory to which the deferred tax asset relates will not be treated as sold within 12 months from the balance sheet date.

Question 62

A company's effective tax rate can best be described as:

A) The company's cash taxes paid divided by taxable income.
B) The company's cash taxes paid divided by net income from continuing operations.
C) The company's financial statement income tax provision divided by taxable income.
D) The company's financial statement income tax provision divided by net income from continuing operations.

Question 63

Green Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $50,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Green subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Green's cash tax rate is:

A) 21%.
B) 20.475%.
C) 19.95%
D) 19.425%.

Question 64

TarHeel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $100,000. In addition, tax depreciation exceeded book depreciation by $200,000. Finally, TarHeel subtracted a dividends received deduction of $50,000 in computing its current year taxable income. TarHeel's accounting effective tax rate is:

A) 21%.
B) 19.95%.
C) 18.9%.
D) 17.85%.

Question 65

Which of the following items is NOT a reconciling item in the income tax footnote?

A) Compensation deduction related to incentive stock options.
B) Compensation deduction related to nonqualified stock options that were expensed for financial accounting purposes.
C) Domestic production activities deduction.
D) State and local income taxes.

Question 66

Cardinal Corporation reported pretax book income of $3,000,000. During the current year, the reserve for bad debts increased by $200,000. In addition, book depreciation exceeded tax depreciation by $100,000. Cardinal sold a fixed asset and reported a book gain of $60,000 and a tax gain of $80,000. Finally, Cardinal deducted $50,000 of domestic production activities deduction on its tax return. Compute Cardinal's current income tax expense or benefit.

Question 67

Heron Corporation reported pretax book income of $4,000,000. Included in the computation were favorable temporary differences of $500,000, unfavorable temporary differences of $700,000, and unfavorable permanent differences of $200,000. Compute Heron's current income tax expense or benefit.

Question 68

Sparrow Corporation reported pretax book income of $5,000,000. During the current year, the reserve for warranties increased by $300,000. In addition, tax depreciation exceeded book depreciation by $400,000. Finally, Sparrow received $50,000 of tax-exempt interest from municipal bonds. Compute Sparrow's current income tax expense or benefit.

Question 69

Which of the following statements is true with respect to a company's effective tax rate reconciliation?

A) The hypothetical tax expense is the tax that would be due if the company's statutory tax rate was applied to the company's net income from continuing operations.
B) The hypothetical tax expense is the tax that would be due if the company's statutory tax rate was applied to the company's taxable income.
C) The hypothetical tax expense is the tax that would be due if the company's statutory tax rate was applied to the company's book equivalent of taxable income.
D) The hypothetical tax expense is another name for the company's effective tax rate.

Question 70

Which of the following temporary differences creates a deferred tax liability?

A) Accumulated tax depreciation in excess of book depreciation on a building.
B) Accumulated tax amortization in excess of book amortization on a customer list.
C) Compensation expensed for book purposes but deferred for tax purposes.
D) Both "Accumulated tax depreciation in excess of book depreciation on a building" and "Accumulated tax amortization in excess of book amortization on a customer list" create a deferred tax liability."

Question 71

As part of its uncertain tax position assessment, Madison Corporation records interest and penalties related to its unrecognized tax benefits of $1,000,000. Which of the following statements about recording this amount is most correct?

A) Madison must record the expense separate from its income tax provision.
B) Madison can elect to include the expense as part of its income tax provision or record the expense separate from its income tax provision, provided the company discloses which option it chose.
C) Madison must record the expense in its income tax provision.
D) Madison does not record the expense until it is paid.

Question 72

Angel Corporation reported pretax book income of $1,000,000. During the current year, the net reserve for warranties increased by $25,000. In addition, tax depreciation exceeded book depreciation by $100,000. Finally, Angel subtracted a dividends received deduction of $25,000 in computing its current year taxable income. Angel's hypothetical tax expense in its reconciliation of its income tax expense is:

A) $210,000.
B) $204,750.
C) $194,250.
D) $189,000.

Question 73

Gull Corporation reported pretax book income of $2,000,000. Included in the computation were favorable temporary differences of $300,000, unfavorable temporary differences of $200,000, and favorable permanent differences of $50,000. Compute Gull's current income tax expense or benefit.
Note: New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change.

Question 74

Which of the following statements about uncertain tax position disclosures is false?

A) ASC 740 requires a company to disclose the amount of unrecognized tax benefits for each country in which it files a tax return.
B) ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits, separated between U.S., state and local, and international tax positions.
C) ASC 740 requires a company to disclose the aggregate amount of unrecognized tax benefits without separation between U.S., state and local, and international tax positions.
D) None of the choices are correct.

Question 75

Which of the following statements best describes the ASC 740 rules related to the disclosure of the components of deferred tax assets and liabilities in the company's income tax note?

A) A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.
B) A publicly traded company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.
C) A privately-held company should disclose the approximate "tax effect" (dollar amounts) of all of the components of its deferred tax assets and liabilities in a footnote to the financial statements.
D) A privately-held company should disclose the approximate "tax effect" (dollar amounts) of only those components of its deferred tax assets and liabilities that give rise to a "significant" portion of net deferred tax liabilities and deferred tax assets in a footnote to the financial statements.

Question 76

What confidence level must management have that a tax position will be sustained on audit before it can recognize any portion of the related deferred tax asset under ASC 740?

A) More likely than not.
B) Reasonable basis.
C) Substantial authority.
D) Probable.

Question 77

Purple Rose Corporation reported pretax book income of $500,000. Tax depreciation exceeded book depreciation by $300,000. In addition, the company received $250,000 of tax-exempt life insurance proceeds. The prior year tax return showed taxable income of $100,000. Compute Purple Rose's current income tax expense or benefit.

Question 78

Which of the following items would likely not be included in the computation of a company's structural effective tax rate?

A) Tax effects of international operations.
B) Tax effects of state and local operations.
C) Tax effects from the R&D credit.
D) Tax effects from goodwill impairment.

Question 79

ASC 740 requires a publicly traded company to disclose the components of its deferred tax assets and liabilities only if the amounts are considered to be:

A) Material.
B) Significant.
C) Pertinent.
D) Important.

Question 80

Which of the following statements best describes the disclosure of a company's deferred tax assets and liabilities?

A) Deferred tax assets and liabilities must be separately disclosed in the balance sheet.
B) All deferred tax assets and liabilities are treated as noncurrent and can be netted and disclosed as one aggregate amount on the balance sheet.
C) Current deferred tax assets and liabilities and noncurrent deferred tax assets and liabilities can always be netted on the balance sheet.
D) All deferred tax assets and liabilities are treated as noncurrent and can be netted on the balance sheet only if they arise in the same tax jurisdiction.